From hunter-gatherer society onwards people in society have experienced the need to cooperate. The need for cooperation, where individuals become dependent on one another, has increased over time as a result of increased ongoing division of labor and specialization. Indeed, as Adam Smith claims, the division of labor and specialization have been an important source of economic development. Individuals no longer master the totality of available knowledge and skills and so the need for exchange of resources and cooperation has increased. This is acknowledged broadly in economics (Hayek 1945; Schumpeter 1934; Nahapiet and Ghosal 1998), but ill understood in that discipline (Lopes and Caldas 2008). As individuals only have partially overlapping goals and interests, exchange and cooperation needs coordination of some sort (Barnard 1968). By necessity, coordination, be it through the market, in a hierarchy or through some other means of cooperation, requires that not only self interest is relied on, but that shared goals and moral convictions are assumed to exist and play a role (Akerlof 1982; Dolfsma 1998; Le Grand 2003; Lopes and Caldas 2008). In a world characterized by emerging knowledge economies, intangible assets such as knowledge and information have become increasingly important for economic dynamics (OECD 2001). Where the conceptualization of coordination of economic activities is problematic even in case of tangibles, in case of a discussion of knowledge creation and diffusion this problem is enhanced. Knowledge has specific properties as a commodity that need to be taken into account when discussing coordination in this context. This chapter will discuss the three different mechanisms of coordination between actors that have been acknowledged in the literature. A first coordination mechanism is market exchange. Well known among economists, market exchange can be defined as voluntary agreement involving the offer of any sort of present, continuing, or future utility in exchange for utilities of any sort offered in return (Weber 1978). Secondly we can identify hierarchies or bureaucracies, well established as a coordination mechanism at least since Williamson (1975). Here authority, derived from a person’s position in an organization, can be used to coordinate. A third coordination mechanism is not as well established. In the literature different terms are used: social relations (Adler and Kwon 2002), communities (Adler 2001; Bowles and Gintis 1998), clans (Ouchi 1979; 1980),
(social) networks (Powell 1990; Miles and Snow 1986; Thorelli 1986). Despite the different terms and descriptions almost all of these concepts have in common that they describe situations where the coordination between individuals is based on socio-cultural mechanisms instead of market or hierarchy. The existing literature has examined the merits of market and hierarchy as a means of coordination, but not in the context of knowledge development and diffusion. Given the relevance of innovation in the current economic context, this is a major concern. Social economics is well positioned to address this issue, as it is able to analyze not just the two coordination mechanisms most often analyzed – market and hierarchy – but also to conceptually grasp the middle ground where social relations and social values play a role. Notwithstanding the ideal typical approach that a conceptual discussion takes almost by necessity, these exchange mechanisms may not necessarily be substitutes but can be complements (Akerlof 1982, Bradach and Eccles 1989).